Eugene Wright is CFO of Caribbean Cruise Lines. The company offers luxury cruises. It's near year-end, and Eugene is feeling kin
d of queasy. The economy is in a recession, and demand for luxury cruises is way down. Eugene doesn't want the company's current ratio to fall below the 1.0 minimum stated in its debt covenant with First Federal Bank. If the company reports a current ratio below 1.0 at year-end, First Federal may require immediate repayment of its $8 million loan, which is not due for another two years.
At the end of the year, Caribbean Cruise Lines reports current assets of $10.1 million and current liabilities of $10 million. These amounts include advanced payments of $1 million from customers in December for cruises to be provided the following summer. Instead of treating the $1 million as deferred revenue, Eugene decided to count the cash received as revenue. He reasoned that cash has already been collected and the company has a long history of providing cruises, so customers will be provided their cruise as scheduled and the company will have cash to pay the bank in the future.
Required:
1. Understand the reporting effect: How does Eugene's decision affect the reported amount of current assets and current liabilities at the end of December?
2. Specify the options: Calculate the current ratio assuming the $1 million is treated as (a) service revenue or (b) deferred revenue.
3. Identify the impact: Does Eugene's decision have an effect on First Federal Bank?
At the end of the year, Caribbean Cruise Lines reports current assets of $10.1 million and current liabilities of $10 million. These amounts include advanced payments of $1 million from customers in December for cruises to be provided the following summer. Instead of treating the $1 million as deferred revenue, Eugene decided to count the cash received as revenue. He reasoned that cash has already been collected and the company has a long history of providing cruises, so customers will be provided their cruise as scheduled and the company will have cash to pay the bank in the future.
Required:
1. Understand the reporting effect: How does Eugene's decision affect the reported amount of current assets and current liabilities at the end of December?
2. Specify the options: Calculate the current ratio assuming the $1 million is treated as (a) service revenue or (b) deferred revenue.
3. Identify the impact: Does Eugene's decision have an effect on First Federal Bank?
1 answer:
Answer:
1) Current Assets and Current Liability before Transection:
$9,100,000 and $10,000,000
Current Assets and Current Liability After Transection:
$10,100,000 and $10,000,000
2a. Treated as a service Revenue Ratio = 1.01: 1
2b. Treated as a deferred Revenue Ratio = 0.92:1
3. Eugene's decision means that First Federal Bank will not require Caribbean Cruise lines to immediately repay the $8 loan
Explanation:
See attachment
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Answer:
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- United Continental with a capital expenditure of 60.68%
- Southwest Airlines with a capital expenditure of 51.38%
Explanation:
Since United Continental's purchases of Boeing planes represent over 60% of their capital expenditures, this means that Boeing had to be the primary plane supplier. Even if the company purchased planes form other manufacturer, their purchases would not even be 40% of the company's purchases.
The same applies to Southwest Airlines, even though the purchases from Boeing are a little lower, they are still over 51%. This means the company could not have spent more money on purchasing planes from another company. The maximum purchase from another airplane manufacturer would have been less than 49% at most.
Besides the previous analysis, you must also consider that the company spends money on things besides airplanes, e.g. new training facilities, equipment, computer software, other vehicles, etc.
